Monthly Archives: July 2020

What Board Members Need to Know about the “E” in ESG

Sheila M. Harvey is a partner, Reza S. Zarghamee is special counsel, and Jonathan M. Ocker is a partner at Pillsbury Winthrop Shaw Pittman LLP. This post is based on a Pillsbury memorandum by Ms. Harvey, Mr. Zarghamee, Mr. Ocker, Ashleigh K. Acevedo, and Roslyn Akel. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here) and Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).


  • Corporate boards should partner with management to ensure appropriate and regular oversight of environmental issues critical to the long-term economic success and reputation of the company.
  • Either the board or an authorized committee should receive briefings on environmental matters/risks that may jeopardize a company’s reputation and corrective action undertaken to address those risks.
  • Management should monitor environmental disclosures and rankings of peer firms and consult with the board on how to improve their company’s standing relative to competing firms and in terms of stakeholder expectations.


Environmental stewardship, including efforts to mitigate climate change and other impacts on the natural environment, is an important and controversial topic in today’s world. Politicians, companies, investors, consumers and the public all have a stake in how businesses approach environmental stewardship. The 2020 Davos Manifesto of the World Economic Forum (WEF) reflects the current trend of scrutinizing businesses based on their environmental performance. Addressing companies and the world’s top 120 CEOs, the Manifesto states, in part:


Proposed Sweeping Changes to the Taxation of Executive Compensation

John R. Ellerman is a partner and Ira T. Kay is a managing partner at Pay Governance LLC. This post is based on their Pay Governance memorandum.


For the past several months, the business community has been focused on navigating the economic turmoil brought on by the COVID-19 pandemic. While many companies have experienced salary reductions, staff layoffs and furloughs, and corporate restructurings, there have been developments in the executive compensation arena that have gone largely unnoticed. One such development is a proposed reform that would lead to an acceleration of the taxation of certain forms of executive compensation.

On February 27, 2020, Senators Bernie Sanders of Vermont and Chris Van Hollen of Maryland introduced the “CEO and Worker Pension Fairness Act” in the U.S. Senate. [1] The proposed legislation was a response by Senators Sanders and Van Hollen to a recent report from the Government Accountability Office (GAO) commissioned by Senator Sanders: “Private Pensions: IRS and DOL Should Strengthen Oversight of Executive Retirement Plans.” [2]


8 Steps for Audit Committees to Navigate the Pandemic

Hille R. Sheppard, Brian J. Fahrney, and Dave A. Gordon are partners at Sidley Austin LLP. This post is based on their Sidley memorandum.

The COVID-19 crisis presents unprecedented challenges for all of us—and everyone has a role to play. Audit committees should consider the following steps to help their companies weather this storm.

1. Watch the “Tone at the Top.” Prioritize the health and safety of employees, customers, vendors and counterparties. This is the right thing to do and also mitigates risk for the company. As the company begins to contemplate re-entry of its workforce, health concerns will need to be weighed against business imperatives, and board members can provide an important perspective.

2. Stay on Top of Operations and Risks. Decisions during crises are often made at “lightspeed,” but boards still have oversight duties and must adequately inform themselves about key decisions, all of which can have regulatory, legal or other implications. Consider requiring more frequent management updates. Document any additional steps taken. Examine action plans and clearly designate who will handle certain challenges. Ask more detailed questions to facilitate learning about issues that may be harder to understand in an extended period of remote meetings. Consider asking for briefings from a broader array of management or external advisors with specialized knowledge. But also know that management has unusual demands at this time, so don’t add to them unnecessarily. Consider, in consultation with management, the enterprise risk management impacts of COVID-19 and its aftermath.


Keynote Speech at the Society for Corporate Governance National Conference

Elad L. Roisman is a Commissioner at the U.S. Securities and Exchange Commission. The following post is based on Commissioner Roisman’s recent Keynote Speech at the Society for Corporate Governance National Conference. The views expressed in this post are those of Mr. Roisman and do not necessarily reflect those of the Securities and Exchange Commission or its staff.


Good afternoon, everyone. Thank you, Keir [Gumbs], for the kind introduction, and thank you to the Society for Corporate Governance for the invitation to speak today. I had been looking forward to seeing everyone in Colorado this week but, of course, life for all of us has changed since we made those plans. Given how hectic I presume the last few months have been for you, I want you to know how much I appreciate that you are taking the time to call in and listen to me speak.

I would like to begin by taking a moment to remember Marty Dunn. He was an incredible lawyer and an even better person. He helped train countless lawyers and was a big figure in the lives of so many in our Division of Corporation Finance and in the securities world. He has left a lasting legacy and my thoughts go out to his family.

Before I continue, I must note that my views and remarks are my own and do not necessarily represent those of the Securities and Exchange Commission (“SEC”) or the other SEC Commissioners.

Proxy Update

I want to use this opportunity to provide a brief update on the proxy reform rulemakings, which the Commission proposed last November. While I cannot give you any details on the substance, I can say that the completion of those rulemakings is a priority for me and for Chairman Clayton. The staff on the SEC’s rulemaking teams has remained focused throughout these past few months digesting the comments we received on both proposals and drafting recommendations for the Commission to finalize each of them. I look forward to considering those recommendations, and I hope we also move forward in pursuing efforts to improve our “proxy plumbing” infrastructure. I continue to think through ways to address the inherent problems with the current framework, and I always welcome new suggestions.


The Spread of Covid-19 Disclosure

Daniel Taylor is Associate Professor of Accounting at the Wharton School of the University of Pennsylvania. This post is based on a recent paper by Professor Taylor; David F. Larcker, James Irvin Miller Professor of Accounting at Stanford Graduate School of Business; Bradford Lynch, PhD Student at The Wharton School; and Brian Tayan, Researcher with the Corporate Governance Research Initiative at Stanford Graduate School of Business.

We recently published a paper on SSRN (“The Spread of COVID-19 Disclosure”) that examines disclosure practices across all U.S. public companies during the initial spread of COVID-19.

Investors rely on corporate disclosure to make informed decisions about the value of companies they invest in. Corporate disclosure includes not only financial statement information that quantifies earnings, cash flows, and changes in the value of assets, but also supplemental information to explain, qualify, or forecast future performance and risks. While the Securities and Exchange Commission requires minimum standards of information in filings, it allows flexibility to go beyond these minimums within the filing and through alternative public channels (such as press releases, earnings conference calls, and industry conferences).

Shareholders value transparency because it improves their ability to price securities, and over time, shareholders’ demand for transparency has led to a steady increase in the amount of information that companies voluntarily disclose beyond regulatory requirements. For a variety of reasons, however, a company might prefer to release less information to the public. A company in a competitive industry or developing a new product might not want to divulge proprietary information that will disadvantage it relative to peers. Alternatively, it might lack foresight about future performance and, out of a desire to avoid legal liability for making inaccurate statements, prefer to disclose less information or use less precision when making statements.


The Role of Long-Term Institutional Investors in Activism

Bhakti Mirchandani is Managing Director and Victoria Tellez is a research associate at FCLTGlobal. This post is based on their FCLTGlobal memorandum. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here) and The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here).

Executive Summary

The prevailing wisdom is that activist investors can drive corporate short-term behavior themselves. The prevailing wisdom is wrong. At just 0.3% of total global equity assets under management (AUM) in 2018, activists depend on the support of long-term investors for their influence.

Without clarity on long-term shareholders’ views, companies perceive short-term pressure coming from their investors, and assume the activists speak for the entirety of the shareholder register. Having a strong investor/corporate dialogue well before an activist campaign arises is the way to encourage companies to proactively improve the drivers of long-term value creation—such as bolstering their governance, honing strategies for growth, and engaging with long-term investors. Strong long-term performance is the best way to limit opportunity for an activist campaign. Indeed, rather than being a spectator, long-term investors have a significant role to play alongside companies to counteract short-term activist behaviors. It is well within the power of these long-term investors to either amplify or dampen the short-term impact of activism, serving as essential players of the activism ‘game.’


DOL Proposes New Rules Regulating ESG Investments

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton, David M. SilkDavid E. KahanSabastian V. Niles, Alicia C. McCarthy, and Carmen X. W. Lu. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here) and Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Robert H. Sitkoff and Max M. Schanzenbach (discussed on the Forum here).

As ESG investing continues to accelerate, the Department of Labor (“DOL”) has proposed for public comment rules that would further burden the ability of fiduciaries of private-sector retirement plans to select investments based on ESG factors and would bar 401(k) plans from using a fund with any ESG mandate as the default investment alternative for non-electing participants. The proposal asserts that “ESG investing raises heightened concerns under ERISA,” and, in contrast to the broader investor community’s recognition that ESG is about value and performance, and despite growing evidence that the investment returns of ESG funds can outperform those of non-ESG funds, the proposal reflects the DOL’s continued concern that ESG investment might “subordinate return or increase risk for the purpose of non-pecuniary objectives.” In terms of defining what would be an ESG-themed fund or mandate triggering heightened scrutiny and procedural requirements, the proposed rule casts the net widely to reach those featuring “one or more environmental, social, corporate governance, or similarly oriented assessments or judgments in their investment mandates, or that include these parameters in the fund name.” Such assessments and judgments have, of course, become common and mainstream, with investors, companies and fiduciaries of all kinds bringing their business determinations to bear.


Fiduciary Duty of Disclosure Does Not Apply to Individual Transactions with Equityholders

Matthew Greenberg and Joanna Cline are partners, and Taylor Bartholomew is an associate at Pepper Hamilton LLP. This post is based on a recent Pepper memorandum by Mr. Greenberg, Ms. Cline, Mr. Bartholomew, and Christopher B. Chuff. This post is part of the Delaware law series; links to other posts in the series are available here.

In Dohmen v. Goodman, the Delaware Supreme Court declined to impose an affirmative fiduciary duty of disclosure on a general partner arising out of the general partner’s solicitation of capital contributions from a limited partner where the general partner knowingly made misrepresentations in the process. The court’s decision provides a comprehensive roadmap not only for general partners in assessing the scope of their fiduciary duties when communicating with limited partners under Delaware law, but also corporate fiduciaries more generally.


In 2010, Bert Dohmen formed Croesus Fund, L.P. (the Fund) as a Delaware limited partnership with the intention of starting a hedge fund. Dohmen also formed Macro Wave Management, LLC to serve as the Fund’s general partner. In 2011, Albert Goodman made an initial capital contribution in the Fund and became a limited partner. During the same year, Dohmen himself also invested in the Fund. Following Goodman’s investment, Goodman inquired several times as to whether there were other investors in the Fund. Dohmen stated that he had several friends who were liquidating assets in order to participate in the Fund, but, according to the court, no friends of Dohmen’s were actually doing so and Dohmen was aware of this. In 2011, Goodman again invested in the Fund. Dohmen represented to Goodman that his friends were interested in the Fund and were reviewing certain investment documents, which the court characterized as a knowingly false statement. In 2012, Dohmen informed Goodman for the first time that there were only two investors in the Fund. Dohmen offered to allow Goodman to withdraw his investments, but Goodman declined. By 2014, the net asset value of the Fund declined to $100,000. Goodman did not receive a return of any portion of his investment.

Five Ways a Sustainability Strategy Provides Clarity During a Crisis

Thomas Singer is a principal researcher in corporate leadership at The Conference Board, Inc. This post is based on his Conference Board.memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here) and Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

The COVID-19 pandemic is requiring companies to focus on survivability—whether they have the financial, human, and other resources to make it through this period of intense disruption. This is also a time, however, for companies to consider the value of their existing sustainability strategies. [1] Companies with robust sustainability programs are more likely to perform well during a downturn. And five key elements of a fully developed sustainability program—a defined corporate purpose, a clear view of what is material (and what is not), an awareness of broader societal challenges, a robust level of engagement and transparency with stakeholders, and a collaborative culture—should improve a company’s ability to prosper in the long run.

Rather than setting aside their sustainability strategies, companies should view the current crisis as an opportunity to reevaluate and strengthen their sustainability programs.

Almost a decade ago, The Conference Board released a report outlining the business case for sustainability. The report highlighted that “awareness has increased among leaders that durable business models cannot be solely based on the maximization of financial performance, and that shareholder value is feeble if the company fails to recognize a broader nexus of stakeholder interests—including those of employees, customers and suppliers, regulators, and the local communities where the company operates.” [2]


The Information Content of Corporate Earnings: Evidence from the Securities Exchange Act of 1934

Oliver Binz is an Assistant Professor of Accounting and Control at INSEAD and John Graham is the D. Richard Mead, Jr. Family Professor at Duke University’s Fuqua School of Business. This post is based on their recent paper.

The Security Exchange Act of 1934 ( “the Act”) is the most expansive secondary market regulation enacted in the history of the United States. The Act was the first federal law to mandate disclosure of audited financial statements, it established the Securities and Exchange Commission (SEC), and is still the basis of much financial litigation. However, according the 2003 Economic Report of the President, “whether SEC enforced disclosure rules actually improve the quality of information that investors receive remains a subject of debate among researchers almost 70 years after the SEC’s creation.” Some even argue that the Act did not improve the quality of information at all. In our new study, The Information Content of Corporate Earnings: Evidence from the Securities Exchange Act of 1934, we revisit the passage of the Act and, using novel data and methodology, conclude that the Act’s implementation of a mandatory disclosure system and increase in enforcement of accounting standards and financial regulation made earnings disclosures more informative to investors.


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